products any goods or services that cannot be provided other than on a group basis because the quantity supplied to any one individual cannot be independently varied. Such products are non-excludable since it is difficult or impossible to exclude any individual from enjoying their benefits, for example, television airwave transmissions. Such products are also non-rival, insofar as one person’s consumption of the product does not affect the consumption opportunities of anyone else. It is virtually impossible to get consumers to reveal their preferences regarding collective goods because rational consumers will attempt to become FREE-RIDERS, each understating his demand in the hope of avoiding his share of the cost without affecting the quantity he obtains. Consequently, such products cannot be marketed in the conventional way and we cannot use market prices to value them. Many goods and services supplied by government are of a collective nature, for example, national defence and police protection, and here government decides on the amounts of such products to provide and compels individuals to pay for them through taxation. See MARKET FAILURE, CLUB PRINCIPLE, SOCIAL PRODUCTS.
collectivism see CENTRALLY PLANNED ECONOMY.
collusion a form of INTERFIRM CONDUCT pattern in which firms arrive at an agreement or ‘understanding’ covering their market actions. Successful collusion requires the acceptance of a common objective for all firms (for example, JOINT-PROFIT MAXIMIZATION) and the suppression of behaviour inconsistent with the achievement of this goal (for example, price competition). Collusion may be either overt or tacit. Overt collusion usually takes the form of either an express agreement in writing or an express oral agreement arrived at through direct consultation between the firms concerned. Alternatively, collusion may take the form of an ‘unspoken understanding’ arrived at through firms’ repeated experiences with each other’s behaviour over time.
The purpose of collusion may be jointly to monopolize the supply of a product in order to extract MONOPOLY profits, or it may be a ‘defensive’ response to poor trading conditions, seeking to prevent prices from dropping to uneconomic levels. Because, however, of its generally adverse effects on market efficiency (cushioning inefficient, high-cost suppliers) and because it deprives buyers of the benefits of competition (particularly lower prices), collusion is either prohibited outright by COMPETITION POLICY or permitted to continue only in exceptional circumstances.
In the UK, under the COMPETITION ACT 1998, collusion in the form of an ANTI-COMPETITIVE AGREEMENT/RESTRICTIVE TRADE AGREEMENT is prohibited outright. Previously, under the RESTRICTIVE TRADE PRACTICES ACT, such agreements were allowed to continue, providing ‘net economic benefit’ could be established. See CARTEL, RESTRICTIVE TRADE AGREEMENT, ANTICOMPETITIVE AGREEMENT, OLIGOPOLY, DUOPOLY, INFORMATION AGREEMENT, RESTRICTIVE PRACTICES COURT.
collusive duopoly see DUOPOLY.
command economy see CENTRALLY PLANNED ECONOMY.
commercial bank or clearing bank a BANK that accepts deposits of money from customers and provides them with a payments transmission service (CHEQUES), together with saving and loan facilities.
Commercial banking in the UK is conducted on the basis of an interlocking ‘branch’ network system that caters for local and regional needs as well as allowing the major banks, such as Barclays and NatWest, to cover the national market. Increasingly, the leading banks have globalized their operations to provide traditional banking services to international companies as well as diversifying into a range of related financial services such as the provision of MORTGAGES, INSURANCE and UNIT TRUST investment and SHARE PURCHASE/SALE.
Bank deposits are of two types:
(a) sight deposits, or current account deposits, which are withdrawable on demand and which are used by depositors to finance day-to-day personal and business transactions as well as to pay regular commitments such as instalment credit repayments. Most banks now pay interest on outstanding current account balances;
(b) time deposits, or deposit accounts, which are usually withdrawable subject to some notice being given to the bank and which are held as a form of personal and corporate saving and to finance irregular, ‘one-off’ payments. Interest is payable on deposit accounts, normally at rates above those paid on current accounts, in order to encourage clients to deposit money for longer periods of time, thereby providing the bank with a more stable financial base.
Customers requiring to draw on their bank deposits may do so in a number of ways: direct cash withdrawals are still popular and have been augmented by the use of cheque/cash cards for greater convenience (i.e. cheque/cash cards can be used to draw cash from a dispensing machine outside normal business hours). However, the greater proportion of banking transactions is undertaken by cheque and CREDIT CARD payments and by such facilities as standing orders and direct debits. Payment by cheque is the commonest form of non-cash payment involving the drawer detailing the person or business to receive payment and authorizing his bank to make payment by signing the cheque, with the recipient then depositing the cheque with his own bank. Cheques are ‘cleared’ through an inter-bank CLEARING HOUSE SYSTEM, with customers’ accounts being debited and credited as appropriate (see also BACS). Credit cards enable a client of the bank to make a number of individual purchases of goods and services on CREDIT over a particular period of time, which are then settled by a single debit to the person’s current account or, alternatively, paid off on a loan basis (see below).
Under a standing order arrangement, a depositor instructs his bank to pay from his account a regular fixed sum of money into the account of a person or firm he is indebted to, again involving the respective debiting and crediting of the two accounts concerned. In the case of a direct debit, the customer authorizes the person or firm to whom he is indebted to arrange with his bank for the required regular payment to be transferred from his account.
Commercial banks make loans to personal borrowers to finance the purchase of a variety of products, while they are a major source of WORKING CAPITAL finance for businesses covering the purchase of short-term assets such as materials and components and the financing of work-in-progress and the stockholding of final products. Loans may be for a specified amount and may be made available for fixed periods of time at agreed rates of interest, or may take the form of an overdraft facility, where the person or firm can borrow as much as is required up to a pre-arranged total amount and is charged interest on outstanding balances.
A commercial bank has the dual objective of being able to meet currency withdrawals on demand and of putting its funds to profitable use. This influences the pattern of its asset holdings; a proportion of its funds are held in a highly liquid form (the RESERVE ASSET RATIO), including TILL MONEY, BALANCES WITH THE BANK OF ENGLAND, CALL MONEY with the DISCOUNT MARKET, BILLS OF EXCHANGE and TREASURY BILLS. These liquid assets enable the bank to meet any immediate cash requirements that its customers might make, thereby preserving public confidence in the bank as a safe repository for deposits. The remainder of the bank’s funds are used to earn profits from portfolio investments in public sector securities and fixed-interest corporate securities, together with loans and overdrafts.
In recent times, the commercial banks have been markedly affected by changes introduced by the FINANCIAL SERVICES ACT 1986, which has allowed other financial institutions to set themselves up as ‘financial supermarkets’, offering customers a banking service and a wide range of personal financial products, including insurance, mortgages, personal pensions, unit trusts and individual savings accounts (ISAs), etc. This development has introduced a powerful new competitive impetus into the financial services industry, breaking down traditional ‘demarcation’ boundaries in respect of ‘who does what’, allowing banks to ‘cross-sell’ these services and products in competition with traditional providers such as the BUILDING SOCIETIES, INSURANCE COMPANIES, UNIT TRUSTS, etc.
This and other developments (in particular, the globalization
